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The revised Payment Services Directive (PSD2) has been a success and is still relevant to the market, but issues such as consistency and competition are holding it back, a new report suggests.

As part of its PSD2 review, the EU has an independent report carried out by VVA, an Italian consultancy, on behalf of the European Commission.

Among the issues highlighted, it has advised the commission to address legal uncertainty within the PSD2, which it warns is “a large cost item” for market participants and leads to an uneven playing field.

In particular, the consultancy recommends that there is a need for close interplay between the directive and the EU’s Markets in Crypto Assets (MiCA) framework, as well as the future regulation of central bank digital currencies (CBDCs).

This is because of the impact that CBDCs and crypto-assets will have on cross-border payments and the competition between payment methods.

At the same time, consumer protection needs might have to be rethought given these methods of payments.

When the PSD2 was originally crafted, these concepts were not yet considered. Crypto had not garnered much interest among regulators, apart from the financial crime perspective, and CBDCs had not yet become a priority for central bankers.

To address these issues, the report proposes establishing a legislative consolidation process between MiCA and PSD2, revising the definition of funds in PSD2 to cover e-money tokens and adding a “quasi-fund” definition to cover asset-referenced tokens.

Meanwhile, it also recommends inserting a chapter in PSD2 on payment service providers that covers the authorisation and supervision of issuers of asset referenced tokens and e-money tokens. It recommends extending the application of the information requirements to also cover payment transactions by these token types.

The consultancy argues that its recommendations may make the directive’s application more effective.

However, it notes that this could receive a negative reaction from crypto-asset issuers and there would also need to be revisions made to the MiCA proposal, which is currently close to the legislative finishing line.

As with the European Banking Authority (EBA) and others, the report also calls for the unification of PSD2 and the Electronic Money Directive (EMD). This is to address legal uncertainty, as well as divergences between the member states.

Here, the report suggests adding a chapter on the authorisation and supervisory requirements for electronic money institutions in PSD3, extending the application of some PSD2 rules to e-money payment transactions and setting a single set of core definitions to be applicable to both e-money and payment services.

These changes, the report advises, will make the application of the laws more effective and reduce one of the largest cost items linked to PSD2 — legal uncertainty and interpretation.

However, the report cautions that it will take “significant time” to frame a consistent legal text.

Consistency

Among the suggested changes, one that will likely resonate within the payments industry is the need for consistent application of PSD2 across member states and a better alignment of licensing and supervisory rules.

While this is an unlikely scenario, some sources have previously said that a regulation, instead of a directive, would make sense for regulating payments in the trading bloc to help tackled this problem.

According to the study, one of the main obstacles to PSD2 fulfilling its objectives relates to the way in which it is applied in the member states.

“Different interpretations of the rules and delays in implementation lead to regulatory fragmentation across the Single Market, which creates the risk of forum shopping and regulatory arbitrage,” the report says.

Of the recommendations set out, the report suggests setting up a standing committee for coordination with a schedule of meetings between the EBA and national authorities.

As part of this recommendation, national supervisory authorities and the EBA would form a standing committee with an annual schedule of meetings on application issues regarding the directive.

The EBA and the national supervisory authorities would meet each other regularly and the EBA would check national supervisory practices for payment institutions and electronic money institutions, as well as the national application of PSD2 rules.

The banking regulator would also regularly inform the commission regarding schedule and outcomes.

The advantages of this include uniform application of licensing and supervisory rules. It would also result in no further costs.

The report, however, acknowledges that national authorities might not change their divergent interpretation and application of PSD2 rules, and the notion of explain or comply, whereby member states would need to justify divergences, may not work in practice.

The consultancy has also touted the possibility of a standing committee being established by the European System of Central Banks (ESCB) with an annual schedule of meetings on PSD2 application issues.

The advantages of this, the report suggests, would include the uniform application of Article 127 of the Treaty of the Functioning of the European Union (TFEU).

This section of the TFEU dictates that “without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union” and normative powers of the oversight functions.

As with the other suggestion, there would be no further costs and the ESCB and its members are already vested with the oversight powers necessary.

Keeping bigtech in line

Although PSD2 applies without prejudice to the application of competition law, including the Digital Markets Act (DMA), the report has shown that under the current PSD2 rules, bigtechs can leverage network effects due to their access to non-payments related data, existing customer bases and technology.

This could create market powers that may prevent or distort competition, the report warns.

In addition, there are different national approaches to the surcharging ban in PSD2, which prohibits merchants from charging consumers fees for most card-based payments.

To minimise these issues, the report recommends:

• Scheduling continued antitrust scrutiny to ensure effective competition investigations on overdraft conditions.
• Regularly informing the European Parliament on the results of the investigations on bigtechs carried out at the national level.
• Creating a public and distributed register with the results of the antitrust investigations.
• Scheduling regular meetings between the ECB, national central banks and the network of antitrust authorities.
• Addressing the operation of retail payment systems as a regulated business.
• Setting up an information structure, such as a list, ledger or map, on member state choices on surcharging to establish which member states used/did not use the option available within PSD2.

The EU needs to strengthen cooperation between national supervisory authorities over payment platforms and digital platforms providing payment services to prevent divergent application of PSD2 and supervisory practices. This will reduce legal uncertainty about PSD2 rules and reduce costs for businesses, the report argues.

Among the recommendations proposed is giving a legal framework to digital platforms providing payment services, such as Amazon and Apple Pay, which is foreseen in the DMA and setting up a supervision committee of platforms on a cross-border basis coordinated by the EBA.